UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K 

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934
 
       FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
                                       OR
 
[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
 
       FOR THE TRANSITION PERIOD FROM              TO
                                      -----------     -----------

 

Commission File Number 1-11476

WORLD WASTE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter) 

               CALIFORNIA                                95-3977501
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)
 
13500 EVENING CREEK DRIVE, SAN DIEGO, CA                   92128
(Address of principal executive offices)                 (Zip Code)

 

Registrant's telephone number, including area code (858) 391-3400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark if whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2006) was approximately $61,905,312. As of March 27, 2007, there were 26,257,122 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part of this Form 10-K.

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TABLE OF CONTENTS

 

                                                                            PAGE
                                                                            ----
 
CAUTIONARY STATEMENT...........................................................1
 
 
GLOSSARY OF SELECTED TERMS.....................................................2
 
 
PART I 2
 
       ITEM 1.   BUSINESS......................................................3
       ITEM 1A.  RISK FACTORS.................................................11
       ITEM 1B.  UNRESOLVED STAFF COMMENTS....................................22
       ITEM 2.   PROPERTIES...................................................22
       ITEM 3.   LEGAL PROCEEDINGS............................................22
       ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........22
 
PART II.......................................................................23
 
       ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
                 STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
                 SECURITIES...................................................23
       ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA.........................24
       ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS................25
       ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...34
       ITEM 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....34
       ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE..........................64
       ITEM 9A.  CONTROLS AND PROCEDURES......................................64
       ITEM 9B.  OTHER INFORMATION............................................65
 
PART III......................................................................66
 
       ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.......66
       ITEM 11.  EXECUTIVE COMPENSATION.......................................66
       ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT AND RELATED STOCKHOLDER MATTERS...................66
       ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                 DIRECTOR INDEPENDENCE........................................66
       ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.......................66
 
PART IV.......................................................................67
 
       ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES...................67
 
SIGNATURES....................................................................72

 

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CAUTIONARY STATEMENT

This report contains forward-looking statements, which reflect the views of our management with respect to future events and financial performance. Certain of the statements contained in all parts of this report including, but not limited to, those relating to our development plans, the effect of changes in strategy and business discipline, the need for a significant waste supply, fluctuations of the market prices of recyclable materials, environmental regulations and litigation, permitting and construction of our processing facilities, the high concentration of our potential sources of revenue, our ability to protect our intellectual property, the development and viability of our technology and recycling process and any other statements regarding future operations, financial results, opportunities, growth, business plans and strategy and other statements that are not historical facts are forward looking.

These forward-looking statements reflect our current view of future events and financial performance. When used in this report, the words "budgeted," "anticipate," "estimate," "expect," "may," "project," "believe," "intend," "plan," "potential" and similar expressions are intended to be among the statements that identify forward-looking statements. These forward-looking statements speak only as of their dates and should not be unduly relied upon. We undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events, or otherwise. Such statements involve risks and uncertainties, including, but not limited to, the numerous risks and substantial and uncertain costs associated with the need for a significant waste supply, fluctuations of the market prices of recyclable materials, environmental regulations and litigation, permitting, construction of our processing facilities, the high concentration of our sources of revenue, our ability to protect our intellectual property, the development and viability of our technology and recycling process, and other factors detailed in this report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes will likely vary materially from those indicated.

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GLOSSARY OF SELECTED TERMS

The following abbreviations and definitions are terms commonly used in the waste industry and throughout this report:

BIOLOGICAL OXYGEN DEMAND (BOD) - A measure of how much oxygen would be depleted from a receiving water (e.g., a lake or stream) if a specific quantity of effluent was released into it. BOD is usually expressed as milligrams per liter.

CELLULOSE BIOMASS - Generally any plant material such as straws, grasses, reeds, and both deciduous and conifer wood species.

CORRUGATING MEDIUM - Unbleached cellulose formed into a sheet with particular properties allowing the sheet to be fluted for use as the inner ply of cardboard container stock.

MATERIAL RECOVERY FACILITY (MRF) - A FACILITY WHERE SOLID WASTES OR RECYCLABLE MATERIALS ARE SORTED OR SEPARATED FOR THE PURPOSES OF RECYCLING OR COMPOSTING.

PRESSURIZED STEAM CLASSIFICATION - A specific combination of temperature, steam, pressure and agitation applied for a specified time period.

RESIDUAL MUNICIPAL SOLID WASTE (RMSW OR RESIDUAL WASTE) - Material remaining in
MSW after recovery of recyclable materials in an MRF.

TIPPING FEE - The amount charged by a facility, usually a landfill or an MRF receiving MSW. The fee is usually quoted on a per-ton basis or a per-yard basis.

UNBLEACHED FIBER - Cellulose fiber of wood origin that contains some coloration from residual lignin and hemi-cellulose that could be removed by bleaching the fiber.

VOLATILE ORGANIC COMPOUND - Generally, a low molecular weight organic liquid such as gasoline, kerosene, and various alcohols, etc., that vaporize at a relatively low temperature.

WETLAP PULP - Cellulose fiber of wood origin that is formed as a sheet with generally 50 +/- 5% solids.

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PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

We are a development stage company formed to develop technologies designed to profitably transform municipal solid waste (MSW) into usable commodities and products such as ethanol, electricity and paper pulp, and to design, build, own and operate facilities that utilize such technologies. We recently completed construction of our first facility in Anaheim, California, located on the campus of the regional transfer facility and Material Recovery Facility (MRF) of Taormina Industries, a wholly owned subsidiary of Republic Services, Inc.

Our Anaheim facility has been in a limited startup phase and has successfully transformed MSW to produce small test quantities of paper pulp, which we have sold to paper manufacturer. We are now utilizing the facility to continue improving our pulp technology and for research and development on additional technologies to create renewable energy products such as ethanol and electricity.

Although our Anaheim facility has successfully transformed MSW to produce paper pulp, we recently determined, based on a number of factors (including the prohibitive cost of making necessary capital improvements), that our initial facility could not under existing circumstances operate profitably on a commercial scale. Accordingly, we have reduced our work force and are running the plant on an intermittent basis so as to avoid the necessity of making certain capital expenditures. Our revised strategy is to utilize the facility solely to continue improving our pulp technology and to conduct research and development activities as we strive to develop additional technologies designed to transform MSW into renewable energy products such as ethanol and co-generated renewable electricity. Because these additional capital investments would be necessary in order to potentially recover the carrying amount of the plant assets through projected future cash flows from operations, we recorded a non-cash asset impairment charge of approximately $9.7 million at December 31, 2006, reflecting the carrying value of a portion of our plant assets. Please see note 3 to our consolidated financial statements for a more detailed description of this impairment charge.

We anticipate that our technologies generally will position us to generate three distinct revenue streams: (a) "tipping" fees charged to the entities that supply us with MSW, (b) recycling revenue from the sale of commodity recyclables (such as aluminum, tin, steel, and plastics) that our process recovers and which otherwise would be interned in landfills, and (c) revenue from the sale of our end product, anticipated to be either ethanol, electricity, or paper pulp, depending on which technology is employed, which in turn will depend upon a number of factors including local market demand. We believe that the fact that we are able to receive fees from the entities that provide us with "feedstock" (i.e. waste) is an important and beneficial characteristic of our process and our design, build, own and operate business model.

According to information currently posted on the National Solid Waste Management Association's website (the most recent publicly available information on this topic that we are aware of), the MSW industry in the United States, the primary market that we plan to serve, accounts for approximately $43 billion in spending. We believe that our existing and future technologies will potentially offer benefits to a number of different constituencies, including solid waste companies (by reducing transportation costs and increasing diversion of waste from landfills), communities and regulators (by increasing recycling rates, lengthening landfill life, gaining a renewable energy source, and reducing traffic), utilities and ethanol distributors (by increasing renewable content in energy production and diversifying ethanol supply away from corn-based production), and environmentally conscious consumers (by decreasing reliance on hydrocarbon-based power, reducing greenhouse gases from landfill methane and truck traffic, and creating ethanol from non-grain sources). We believe that our process will compliment the existing investment made by communities to create and expand curbside recycling programs by targeting the MSW that is still going to the landfill (the "residual MSW", or "RMSW"). RMSW may have already been processed by an MRF, and often contains material that has historically been the most difficult portion of MSW to recycle.

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OUR ANAHEIM FACILITY

At our Anaheim facility, we use a rotating pressure vessel to combine steam, heat, pressure and agitation to change the waste's physical composition. The process converts paper, cardboard, and paper packaging found in RMSW into a cellulose biomass fiber-containing material. The cellulose biomass can be screened and cleaned using conventional and non-conventional pulp recycling equipment, and the resulting unbleached fiber, known as "wetlap" pulp, can be used as a raw material for making new lower grade paper stocks such as linerboard, corrugating medium, and packaging.

We have entered into a long-term contract with Taormina to supply us with RMSW. We began processing RMSW at our Anaheim facility on a limited start-up basis during the second quarter of 2006, and since then have processed over 2,500 tons of RMSW through the facility and the resulting cellulose biomass has been refined into over 400 tons of wetlap pulp. This wetlap product has been supplied to several cardboard and paper manufacturers with operations in Southern California. We have also sold a limited amount of the other inorganic, recyclable materials captured by our process including aluminum, steel, tin and plastics, into various commodity markets.

Although our customers have provided positive feedback on the pulp quality and specifications and have requested continued shipments, we recently became aware of several issues with our process, including its creation of an unexpectedly high level of biological oxygen demand (BOD) from organic wastes in the wastewater from the pulp screening and cleaning process, and design issues related to the steam classification vessels. These issues would require a significant level of reengineering and repairs to put us in a position to potentially conduct sustained and profitable operations on a commercial level at our current facility.

Due to, among other factors, the significant costs of additional capital improvements required at our Anaheim plant that would be necessary in order to address the BOD issue, we recently decided not to make these improvements for the pulp process or to actively pursue the creation or sale of wetlap pulp generated at this plant. Rather, we plan to expend our resources on analyzing the data gathered through the plant's limited operation and refining those lessons learned from the design, construction, commissioning and operation of the plant. We will focus our cash spending on the development of additional larger scale facilities and on the development of our renewable energy platform which we believe holds the potential for better returns than investing additional capital in a small scale facility. Accordingly, we recently reduced our workforce and began to run the plant on an intermittent basis for process improvement trials, technology demonstration, product development and other research and development initiatives, including as relates to the production of ethanol and electricity. We expect to continue to use the steam classification assets at the Anaheim facility in a research mode in an effort to develop ethanol, electricity and pulp opportunities until such time, if ever, as we can develop or acquire the technology to enable us to operate the plant profitably.

Based on our research and development, including our accumulated experience from operating the Anaheim plant, we believe the necessary characteristics for the successful development of additional wetlap-based MSW conversion facilities include: a relatively high volume of MSW, larger physical plant enabling a larger scale operation, a desire by the community to increase recycling rates to minimize the amount of this waste disposed of in landfills, feedstock composition which includes a higher amount of paper products, a fully scoped on-site water treatment facility, and higher landfill tipping fees than we currently receive in Anaheim, California. We plan to continue to conduct business development discussions with various paper and solid waste companies and government agencies to determine where the proper combination of operating characteristics can be achieved to pursue a larger scale wetlap production facility in future locations.

ETHANOL AND ELECTRICITY OPPORTUNITIES

We recently began pursuing the development of various energy products which can be produced from MSW. One process which we believe has potential for successful commercialization involves using gasification technologies to produce a synthetic gas (or "syngas") from wetlap or intermediate products in our process. This syngas can be used to produce energy to drive a turbine or passed through a catalyst environment to produce fuel grade alcohols, primarily ethanol. We believe this same basic process can also be used to produce hydrogen for

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industrial applications and fuel cells. In this area we recently filed a provisional patent covering a process and certain conditions, which we believe may maximize the yield of these alcohols. A by-product of the catalyst process is a residual producer gas that can be used for the beneficial co-generation of renewable electricity. The syngas can be used to fire either a boiler driving a steam turbine, or a gas-fired turbine, and thereby produce energy to reduce our utility costs.

Also in the ethanol area, in addition to the above process for producing fuel alcohols through gasification, we are investigating alternative pathways for transforming our cellulose biomass product into ethanol using various acid and enzymatic hydrolysis processes. We have produced small quantities of ethanol through an intermediate acid hydrolysis process in the early trials and are currently performing additional testing and engineering studies to determine the economic feasibility of a commercial size plant based on the insights from our research.

We recently established a Technical Advisory Board to assist us in advancing our business of creating usable commodity products from MSW, particularly as it pertains to developing our ethanol and electricity technologies.

STRATEGY

Our goal is to profitably transform residual MSW into usable commodity products, such as ethanol, electricity, and paper pulp and to build, own and operate facilities to accomplish this goal. Our strategies to achieve our goal include the following:

PRELIMINARY COMMERCIALIZATION AND FURTHER RESEARCH AND DEVELOPMENT. Technical feasibility and process characterization of our RMSW to pulp process has been achieved at our facility in Anaheim. We are now utilizing the facility to collect further detailed operating data in anticipation of developing a potential full-scale plant. We are also using the facility to perform research and development on alternative energy technologies for processing RMSW, such as gasification for the production of electricity and ethanol, and acid hydrolysis for the production of ethanol. We are investigating the installation of a small-scale gasification unit in Anaheim or elsewhere, with the intention of collecting detailed operating data on ethanol and electricity production. In addition we anticipate constructing a small-scale hydrolysis facility to generate ethanol from MSW. We anticipate that this phase of our strategy will continue through at least the remainder of 2007.

FULL SCALE FACILITY AND COMMERCIALIZATION. We are in the early stages of identifying potential sites for our next facility, which we anticipate will be a full-scale facility. We are identifying high priority sites and targeting locations with advantageous MSW tip fees and volume.

REPLICATION AND ROLLOUT. We anticipate that our technologies will be configured to meet the needs of the local market, and we will seek to develop additional facilities, implementing the most profitable end product platforms on a site by site basis. We will seek to develop facilities in the most favorable locations within the United States, and we anticipate exploring licensing opportunities to accelerate the rollout. We plan to leverage experienced engineering and construction partners for the most effective utilization of our resources.

In addition, as part of the implementation of our strategy, we may investigate potential acquisitions. In general, we may seek acquisition candidates with characteristics that included: (a) established and growing revenue, (b) positive cash flow, or (c) technology or strategy that complements our focus.

Our ability to implement our strategy will be dependent upon our ability to raise significant amounts of additional capital, of which there can be no assurance.

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CORPORATE HISTORY OF REVERSE MERGER

We were formed as a result of two mergers that occurred in 2004. First, in March 2004, World Waste of America, Inc. ("WWA") merged with and into a wholly owned subsidiary of Waste Solutions, Inc. ("WSI"), a California corporation. Cagan McAfee Capital Partners and its affiliates were the controlling shareholders of WSI. As a result of this merger, WSI continued as the surviving corporation, assumed the operations and business plan of WWA, the stockholders of WWA became stockholders of WSI, and WSI changed its name to World Waste Technologies, Inc. ("Old WWT").

In March 2004, Old WWT entered into an Agreement and Plan of Reorganization with Voice Powered Technologies International, Inc., a California corporation ("VPTI"), to merge with and into a wholly owned subsidiary of VPTI. VPTI was a publicly traded company trading under the stock symbol VPTI.OB. VPTI had no material assets, liabilities or operations. The merger of Old WWT with VPTI's wholly owned subsidiary was completed on August 24, 2004. Pursuant to the merger, Old WWT's shareholders became the holders of approximately 95% of the outstanding shares of VPTI. Upon completion of this merger, VPTI changed its name to World Waste Technologies, Inc. VPTI was incorporated on June 21, 1985 and provided voice recognition and voice activated products. We currently do not plan to conduct any business other than operations heretofore conducted or contemplated to be conducted by WWT. Because the shareholders of Old WWT became the controlling shareholders of VPTI after the merger, Old WWT was treated as the acquirer for accounting purposes, and therefore the transaction was accounted for as a reverse merger. Accordingly, for accounting purposes, the historical financial statements presented are those of Old WWT. Additionally, the prior operating results of VPTI are not indicative of our future operations, and none of the assets or liabilities on our balance sheet as of December 31, 2006 and 2005 relate to VPTI prior to the merger.

Since the formation of WWA in 2002, our efforts have been principally devoted to research and development activities, construction of our initial facility, raising capital, and recruiting additional personnel and advisors. To date, we have not generated any significant revenues. We do not anticipate generating significant revenue until sometime in 2007, if ever.

Our stock is quoted on the OTC Bulletin Board under the symbol WDWT.

OUR PLANNED REVENUE AND ANTICIPATED MARKETS

Pursuant to our current business model, we anticipate our product and services will result in three distinct revenue streams. First, we would receive a "tipping fee" for each ton of RMSW delivered to and processed by us. For example, under the terms of our agreement with Taormina, Taormina has agreed to pay us an initial tipping fee paid per ton (payable monthly) of "Net Processed Waste" (defined as the total RMSW delivered to us less the total residual/non-processable waste removed by WWT for handling and disposal by Taormina). This tipping fee is subject to increase or decrease based upon changes in certain county landfill disposal fees Taormina is required to pay. Second, our process is expected to mechanically sort and collect standard recyclable materials such as scrap steel, cans, and aluminum. We expect to collect and sell these materials to Taormina for resale to commodities buyers. Third, our process is expected to enable us to produce a commodity product such as ethanol, electricity or wetlap pulp that can be sold in commercial quantities. We plan to accomplish this by refining the cellulose biomass we produce into (a) unbleached fiber in the form of wet-lap pulp suitable for sale to paper and board manufacturing facilities for incorporation into their products, (b) electricity and potentially ethanol through gasification technology, or (c) ethanol through acid hydrolysis.

Our plan is to provide waste processing services to other companies and municipalities in the MSW industry throughout the United States. The MSW industry in the United States is dominated by large MSW processors such as Waste Management, Inc., Allied Waste Industries, Inc. and Republic Services, Inc. Many

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other smaller regional companies and municipalities are also in the waste handling business. Many state governments in the United States mandate that certain percentages of all MSW be recycled. The State of California, where our headquarters and our Anaheim facility are located, currently mandates the highest standard in the United States by requiring that 50% of all incoming MSW be diverted from landfills. We believe that the trend in state law throughout the country is to migrate toward this California standard. Accordingly, we anticipate providing our processing services to MSW handlers looking for efficient ways to increase the percentage of their recycled MSW.

We plan to use the biomass fiber we produce to conduct research and development to determine its use in producing unbleached fiber or wetlap pulp for making new lower-grade paper stocks such as linerboard, corrugating medium, and packaging, and also to determine its use in producing ethanol, specialty chemicals, synthetic gas, and other energy products, building products and other industrial products.

Our process is expected to mechanically sort and collect other inorganic standard recyclable materials such as scrap steel, tin cans, and aluminum cans and scrap. These materials are expected to be collected and sold to Taormina.

SALES AND MARKETING

We currently plan to market our services to waste handlers, waste collectors and municipalities, focusing on higher recycling rates, with the goal of lowering use of the landfills and creating a cost savings for these customers. In addition, we plan to sell the other inorganic standard recyclable materials such as scrap steel, cans, and aluminum to Taormina for bailing and selling in the marketplace. We also plan to market our wetlap pulp to paperboard and packaging mills as a raw material for making new lower-grade paper stocks such as linerboard, corrugating medium, and packaging, among other things, and to sell ethanol and electricity products into their respective markets.

Other than the Taormina agreement which requires Taormina to provide us with up to 2,500 tons of waste per day, 500 tons for the initial facility and 2,000 tons for an anticipated second facility, and to pay us for every ton of RMSW that we process, as well as pay us 90% of the price Taormina receives for standard recyclable materials we collect in our process, we currently do not have any agreements in place to market any of our products or services. We currently plan to establish an in-house marketing and sales program to promote our services. Alternatively, we may enter into strategic alliances with larger companies. We currently expect that our services and products will be marketed in the U.S., although we may also pursue specified international opportunities.

THE TAORMINA AGREEMENT

In June 2003, we entered into a 10-year contract, with Taormina Industries, a wholly owned division of Republic Services, Inc. The Taormina Recycle Agreement requires Taormina to deliver up to 500 tons of RMSW per day to us for processing at our Anaheim facility on the campus of Taormina in Anaheim, CA. Under the terms of the Taormina agreement, Taormina is required to pay us a tipping fee per ton of RMSW delivered to us. The second phase of the Taormina agreement calls for us to build a 2,000-tons per day plant in the Orange County, California area. The Taormina agreement also grants Taormina a right of first refusal to participate in potential future projects in an additional 10 counties throughout California where Republic Services has operations. Our success is highly dependent upon the ability of both parties to the contract to fulfill their obligations, of which there is no assurance.

The Taormina agreement was amended twice to allow us additional time to complete all permitting, approvals and construction and to occupy the facility. We completed the primary construction of this facility early in the second quarter of 2006. In April 2006, Taormina accepted our completion and commencement notification in accordance with the lease agreement.

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In the agreement, we represented to Taormina that the residual waste we deliver to them would not exceed 40%, by weight, of the associated RMSW delivered to us by Taormina. Currently, we are not in compliance with this representation because the waste that we are delivering to Taormina contains too high a quantity of residual streams of waste that Taormina must send to the landfill. Due to the start-up nature of our operations, we have not yet determined the most efficient method of resolving this issue. Potential solutions include identifying third party sources willing to accept these residual streams, and/or making changes to our process. Even if we are unable to resolve this problem we believe that the waste we deliver under the agreement will be acceptable to Taormina. However, until we are able to remedy this situation, Taormina could attempt to renegotiate or terminate the agreement or refuse to accept any waste from us.

The Taormina agreement also provides that Taormina's obligations are subject to our ability to maintain compliance with all necessary permits and that Taormina may suspend delivery of MSW to us at any time if it determines that our operations would threaten to place Taormina's operations in non-compliance with its own permits or other governmental approvals.

COMPETITION

We expect to compete with numerous other products, technologies and services that are in use currently or are subsequently developed by companies, academic institutions and research institutions. These competitors consist of both large established companies as well as small, single product or service development stage companies. We expect competition from these companies as they develop different and/or novel approaches to the processing of MSW. Some of these approaches may directly compete with the products or services that we are currently developing.

According to the July 17, 2006 issue of WASTE NEWS (the most recent publicly available information on this topic that we are aware of), three companies dominate the MSW industry in the United States: Waste Management, Inc. ($13.1 billion in revenues); Allied Waste Industries, Inc. ($5.73 billion in revenues); and Republic Services, Inc. ($2.86 billion in revenues). There are also many smaller regional companies and municipalities in the waste handling business. Although we do not view MSW haulers as competitors, but rather as consumers for the services we plan to provide, such haulers would be competitors to the extent they make capital investments in material recovery facilities, incineration, composting, or landfills rather than outsourcing through us. We believe that the primary competitive factors in our industry are price, reliability of service, and quality of recycling programs.

Corrugated packaging and mixed waste paper companies may also be a source of competition for us. Our process converts MSW into a sanitized cellulose fiber containing material, which once screened and cleaned using conventional paper recycling equipment, is known as "wetlap pulp." Wetlap pulp can be used by many paper mills in the manufacture of corrugating cardboard and associated packaging materials and other products. These paper mills also use other feedstocks such as used cardboard, mixed waste paper and virgin pulp in their mill processes. To the extent that companies which provide other feedstocks which may include MRFs, meet or exceed the demand of the mills for feedstock, they could have a negative impact on the demand for our wetlap.

Several companies have developed businesses burning MSW to generate energy. Others have focused on converting MSW to recyclables, ethanol or other beneficial uses. These companies may compete against us for MSW supply contracts.

Several companies are attempting to create ethanol from cellulosic sources such as corn. We believe that MSW is superior to corn as a feedstock for ethanol production for numerous reasons. For instance, (a) corn must be grown, harvested, and delivered, all of which add cost, (b) ethanol diverts corn from food use, which may raise the cost of other foods, (c) significant energy in the form of planting, harvesting, and transportation must be expended to grow corn, and (d) growing corn requires significant other resources, such as water,

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fertilizer, and gasoline. By contrast, we believe utilizing MSW to produce ethanol can be beneficial for numerous reasons including, (a) MSW is comparatively inexpensive because we would be paid a tip fee to accept it, (b) utilizing MSW achieves landfill diversion goals, (c) MSW is located in areas where ethanol is in demand, and (d) MSW has a strong positive energy balance. Nevertheless, there are numerous large and well capitalized companies in the corn to ethanol production industry which may compete with us for investor resources and in the sale of ethanol.

REGULATION

Our business is subject to extensive federal, state and local environmental, health, safety and transportation laws and regulations. These laws and regulations are administered by the Environmental Protection Agency ("EPA") and various other federal, state and local environmental, zoning, transportation, land use, health and safety agencies in the United States. Many of these agencies regularly examine our operations to monitor compliance with these laws and regulations and have the power to enforce compliance, obtain injunctions or impose civil or criminal penalties in case of violations.

Because a major component of our business will be the processing of solid waste in an environmentally sound manner, a portion of our capital expenditures is related, either directly or indirectly, to environmental protection measures, including compliance with federal, state or local provisions that regulate the discharge of materials into the environment. Although we only incurred approximately $10,000 of expenses relating to our compliance with environmental laws in 2006, we anticipate that there will be significant costs if and when the plant is operational on a commercial-scale level and that there will be significant costs associated with sighting, design, operations, monitoring, site maintenance, corrective actions, and financial assurance of each facility that we plan to operate going forward. In connection with our development or expansion of a facility, we must often spend considerable time, effort and money to obtain or maintain necessary required permits and approvals. There cannot be any assurances that we will be able to obtain or maintain necessary governmental approvals. Once obtained, operating permits are subject to modification and revocation by the issuing agency. Compliance with these and any future regulatory requirements could require us to make significant capital and operating expenditures. Although we were able to obtain all of our environmental permits that were necessary in order for us to complete the construction of our initial facility in Anaheim, California, we cannot assure you that we will successfully retain these permits, or that we will obtain or retain the permits required to operate this or any additional facilities we may seek to construct.

The primary United States federal statutes affecting our business as currently conducted are summarized below:

The Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), regulates handling, transporting and disposing of hazardous and non-hazardous wastes and delegates authority to the states to develop programs to ensure the safe disposal of solid wastes. In 1991, the EPA issued its final regulations under Subtitle D of RCRA, which set forth minimum federal performance and design criteria for solid waste landfills. These regulations must be implemented by the states, although states can impose requirements that are more stringent than the Subtitle D standards. We expect to incur costs in complying with these standards in the ordinary course of our operations.

The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), which is also known as Superfund, provides for federal authority to respond directly to releases or threatened releases of hazardous substances into the environment. CERCLA's primary means for addressing such releases is to impose liability for cleanup of disposal sites upon current and former site owners and operators, generators of the hazardous substances at the site and transporters who selected the disposal site and transported substances to the site. Liability under CERCLA is not dependent on the intentional disposal of hazardous substances; it can be based upon the release or threatened release, even as a result of lawful, unintentional and non-negligent action, of hazardous substances as the term is defined by CERCLA and other applicable statutes and regulations.

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The Federal Water Pollution Control Act of 1972 (the "Clean Water Act") regulates the discharge of pollutants into streams, rivers, groundwater, or other surface waters from a variety of sources. If run-off from our operations may be discharged into surface waters, the Clean Water Act would require us to apply for and obtain discharge permits, conduct sampling and monitoring, and, under certain circumstances, reduce the quantity of pollutants in those discharges. In addition, if a landfill or a transfer station discharges wastewater through a sewage system to a publicly owned treatment works, the facility must comply with discharge limits imposed by the treatment works. The Clean Water Act provides for civil, criminal and administrative penalties for violations of its provisions.

The Clean Air Act of 1970, as amended, provides for increased federal, state and local regulation of the emission of air pollutants. The Clean Air Act would likely apply to certain of our planned and potential operations, including gasification of MSW, solid waste landfills and waste collection vehicles.

The Occupational Safety and Health Act of 1970, as amended ("OSHA"), establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Safety and Health Administration, and various record keeping, disclosure and procedural requirements.

There are also various state and local regulations that affect our existing and potential future operations. Sometimes states' regulations are stricter than comparable federal laws and regulations.

Many states, provinces and local jurisdictions have enacted "fitness" laws that allow the agencies that have jurisdiction over waste services contracts or permits to deny or revoke these contracts or permits based on the applicant's or permit holder's compliance history. Some states, provinces and local jurisdictions go further and consider the compliance history of the parent, subsidiaries or affiliated companies, in addition to the applicant or permit holder. These laws authorize the agencies to make determinations of an applicant or permit holder's fitness to be awarded a contract to operate, and to deny or revoke a contract or permit because of unfitness, unless there is a showing that the applicant or permit holder has been rehabilitated through the adoption of various operating policies and procedures put in place to assure future compliance with applicable laws and regulations.

RESEARCH AND DEVELOPMENT

During 2006, 2005 and 2004, we spent $273,894, $250,060 and $284,587, respectively, on research and development activities. During 2007, we have redirected our activities to focus on research and development activities primarily in alternative energy. Therefore, we expect research and development expense to increase significantly in 2007.

INTELLECTUAL PROPERTY

On June 21, 2002, we entered into a U.S. technology sub-license agreement with Bio-Products International, Inc., an Alabama corporation, with respect to several patent claims and other related intellectual property relating to the methods and processes developed by the University of Alabama in Huntsville ("UAH"). The technology was designed to provide for the processing and separation of material contained in MSW. Temperatures of several hundred degrees sterilize the material and the pressure and agitation cause a pulping action. A combination is designed to result in a large volume reduction, yielding a high-density cellulose biomass product. The significant portion of the material is a biomass cellulose with significant papermaking fiber content that may be sold to container board plants after a screening and cleaning process. The most recent patent includes the capturing of all Volatile Organic Compounds and was granted by the United States Patent and Trademark Office in October 2001. (See note 5 to the accompanying audited financial statements.)

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On May 1, 2006, we purchased the patent for this technology, subject to existing licenses, from UAH, for a payment of $100,000 in cash and 167,000 shares of our common stock. The common stock was valued at $698,000, the fair value on May 1, 2006. We continue to exploit the technology covered by this patent through our sub-license from BPI. By virtue of our acquisition of the patent, we now own all right, title and interest in the patent, subject to BPI's existing license, which in turn continues to sublicense the technology to us.

Under the sub-license agreement, we paid an upfront sub-license fee of $350,000 and currently pay a monthly fee for technical services of $20,000. We are also required to pay a daily per-ton royalty based on the tons of waste processed utilizing the technology of $0.50 for the first 2,000 tons processed, $1.00 for the next 8,000 tons processed and $1.50 for any additional tons processed. We also pay royalties based on the sales price of fiber products recovered from the process of 2.5% of the gross sales price in excess of $10.00 per ton.

The sub-license agreement between us and BPI covers technology developed by BPI, its affiliates, and UAH, and generally covers technology relating to the volume reduction, separation, recovery, treatment, recycling and utilization of various components of waste materials. Other than as described below, we hold exclusive rights to this technology in all applications throughout the United States.

BPI retained the exclusive right to utilize this technology in Arkansas, and the non-exclusive right to utilize technology to construct up to four facilities in any of Alabama, Tennessee, Georgia and/or South Carolina. In addition, BPI retained the exclusive right to utilize the technology in the United States for applications in which the cellulosic by-product of the process utilizing the technology is either used directly as a fuel source or converted into an end product for energy production; however, BPI agreed to grant us a sub-license for such applications on a site-specific basis upon our request. Accordingly, BPI may grant third parties the right to use the technology for the production of marketable solid combustion fuel end products. We hold no rights under the technology outside of the U.S. By acquiring title to the patent from UAH, we effectively reduced the royalties payable by us to BPI by approximately 9%. In addition, by becoming the patent holder ourselves, we are no longer at risk of losing the right to practice the technology claimed in the patent in the event that BPI were to breach its agreement with the patent holder.

The license extends until the expiration date of the last patent issued to BPI covering the technology, which is expected to occur on October 23, 2021. In its license with us, BPI is required to continue to make certain payments to us to maintain exclusivity.

EMPLOYEES

As of February 28, 2007, we had 13 full-time employees. There are four members in our executive management team and 9 persons employed in operations and administration. We are not a party to any collective bargaining agreements. We have not experienced work stoppages and we believe that our relationship with our employees is good.

ITEM 1A. RISK FACTORS

IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR FUTURE GROWTH COULD SUFFER. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION IN THIS REPORT, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES. FOR THE DEFINITION OF SOME OF THE TERMS USED IN THIS SECTION AND THROUGHOUT THIS REPORT, YOU SHOULD REFER TO THE "GLOSSARY OF SELECTED TERMS."

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WE FACE DELAYS IN THE DEVELOPMENT OF OUR TECHNOLOGY, WE NEED TO DEVELOP AND/OR ACQUIRE NEW TECHNOLOGIES, AND ANY TECHNOLOGY WE USE MAY NOT WORK AS WELL AS EXPECTED, IF AT ALL, OR EVER BE ECONOMICALLY VIABLE.

The steam classification and processing technology that we intend to use has not yet been widely applied within the municipal solid waste industry and may not work as well as expected or be economically viable. The successful application of the technology at large scale and high volumes to create commercially usable cellulose fiber, electricity, ethanol or other products has yet to be proven. Any inability under our current plan to operate our Anaheim plant in a manner that will produce large volumes of commercially usable cellulose fiber may require additional investment in capital equipment and/or increased operating expenses beyond currently contemplated business and construction plans. Potential issues may include, but are not limited to, handling large quantities of textiles and other debris, unforeseen labor and energy costs, higher than expected contamination levels of the water discharge to the sewer, and capturing sufficient cellulose in the process. Unforeseen difficulties in the development or market acceptance of this cellulose fiber may lead to significant delays in production and the subsequent generation of revenue. For example, laboratory testing of the cellulose biomass created during trials since December 2005 indicated that higher than anticipated levels of BOD will result from our fiber cleaning and screening process. Although we believe technology to address and remove these BOD levels is readily available to us and that equipment incorporating such technology can be installed at this facility, we have determined, based on the size of our facility, the regulatory environment in which the facility is located, and the level of tipping fees we generate, not to expend any additional funds to address this BOD problem. We have instead redirected our focus to research and development activities during the remainder of 2007 and will continue to analyze changes to the Anaheim plant that could enable us to operate profitably at such facility. We also need to seek to develop or identify and acquire other technologies to enable us to continue to pursue our strategy. In any event we will need to raise additional financing which, if not available, could force us to curtail or cease operations altogether.

WE MAY BE UNABLE TO OBTAIN THE LARGE AMOUNT OF ADDITIONAL CAPITAL THAT WE NEED TO EXECUTE OUR BUSINESS PLAN.

Our business plan includes the construction and operation of additional plants and the development and/or acquisition of new technologies. Each plant is expected to cost between $50 million and $70 million. We anticipate that we will fund the construction and startup operation of these plants through the sale of securities or the issuance of debt. We may be unable to raise the additional funds necessary to build and operate these additional plants. You should not rely on the prospect of future financings in evaluating us. Any additional funding that we obtain may reduce the percentage ownership of the company held by our existing stockholders. The amount of this dilution may be substantially increased as the trading price of our common stock declines.

WE MAY BE UNABLE TO ACHIEVE COMMERCIAL PRODUCTION LEVELS AT OUR INITIAL FACILITY ON A TIMELY BASIS OR AT ALL.

We recently completed construction of our initial facility in Anaheim, California. Prior to completion, laboratory testing of the cellulose biomass created during certain trial runs of our process indicated that the level of biological oxygen demand ("BOD") that will result from our process would be higher than the levels previously anticipated. We believe that the sewer surcharges by the local sanitation district as a result of such discharges would negatively affect our profitability. We believe that the technology capable of significantly reducing these BOD discharges to acceptable levels is readily available to us and that equipment incorporating such technology is available for purchase and installation at our facility. However, we have determined that the costs to remedy the BOD problem is greater than we are willing to spend at this time on the Anaheim facility. We have taken an impairment charge for the "wetlap" processing equipment in 2006. We plan to spend the remainder of 2007 focusing on research and development. We plan to make appropriate changes to the "steam classification" equipment during 2008 depending on the results of the research and development.

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WE ANTICIPATE THAT A SUBSTANTIAL PORTION OF OUR REVENUES WILL BE GENERATED FROM OUR AGREEMENT WITH TAORMINA INDUSTRIES; WE ARE NOT CURRENTLY IN COMPLIANCE WITH ALL OF OUR OBLIGATIONS UNDER THIS AGREEMENT.

In June 2003, we signed a 10-year contract with Taormina Industries, a division of Republic Services, Inc. The agreement provides for Taormina to deliver up to 500 tons of MSW per day to us for processing at our Anaheim facility on the campus of Taormina in Anaheim, California. The second phase calls for us to build an additional plant in the Orange County area at which Taormina will deliver up to an additional 2,000 tons of MSW per day. The agreement grants Taormina a right of first refusal to participate in potential additional projects in an additional 10 counties throughout California where Taormina has operations. Under the terms of the agreement, Taormina is required to pay us a per ton tipping fee. We anticipate that a substantial portion of our revenues will be generated from this agreement for the foreseeable future.

The Taormina agreement, as amended, provides that Taormina's obligations are subject to our ability to maintain compliance with all necessary permits and that Taormina may suspend delivery of MSW to us at any time if it determines that our operations would threaten to place Taormina's operations in non-compliance with its own permits or other governmental approvals. In addition, in the agreement we represented to Taormina that the residual waste we deliver to them would not exceed 40%, by weight, of the associated MSW delivered to us by Taormina. Primarily because we are currently operating the plant solely in a research and development mode, we are not currently in compliance with this representation. Until we are able to remedy this situation, Taormina could attempt to re-negotiate or terminate the agreement or refuse to deliver any waste from us. If Taormina were to stop delivering MSW to us for any reason or if we are unable to extend this agreement on terms favorable to us or at all prior to its expiration, our business, financial condition and results of operations would be materially harmed.

IF WE FAIL TO IMPLEMENT NEW TECHNOLOGIES, WE WILL NOT BE ABLE TO KEEP UP WITH OUR INDUSTRY, WHICH COULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS.

We expect to utilize patented and proprietary steam classification technology in our processing facilities and to adopt other technologies from time to time. Our ability to achieve profitability and future growth is dependant on our ability to improve our knowledge and implementation of waste processing and energy development technologies. Inability to successfully implement commercially viable waste processing technologies will have a material adverse effect on our business and results of operation.

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT FUTURE RESULTS.

We are in the development stage and are subject to all the business risks associated with a new enterprise, including uncertainties regarding product development, constraints on our financial and personnel resources, and dependence on and need for third party relationships. For the period from June 18, 2002 (inception) to December 31, 2006, we incurred total net losses of approximately $32.0 million. To date, we have not generated substantial revenues and do not know when or whether we will be able to develop meaningful sources of revenue or whether our operations will become profitable, even if we are able to begin generating sufficient revenue. If we are unable to generate sufficient revenue, we would need to develop a new business plan or curtail or cease operations completely.

The auditors' report with respect to our financial statements for the fiscal years ended December 31, 2006 and December 31, 2005 includes an explanatory paragraph wherein they expressed substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of these uncertainties.

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THE MARKET FOR SERVICES AND PRODUCTS IN THE SOLID WASTE PROCESSING AND RECYCLING INDUSTRY IS COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.

The market for services and products in the solid waste processing industry is highly competitive. Most of these competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we have, and may be able to respond more quickly than we can to new or changing opportunities and customer requirements. Also, our competitors have greater name recognition and more extensive customer bases that they can leverage to gain market share. These competitors are able to undertake more extensive promotional activities, adopt more aggressive pricing policies and offer more attractive terms to purchasers than we can, which could adversely affect our competitive position and business. Likewise, the selling cycle for developing, permitting, financing and constructing new plants is long and will consume considerable resources. We may be unable to develop additional projects in a timely manner which may adversely affect our business.

WE MAY ENGAGE IN STRATEGIC TRANSACTIONS THAT MAY FAIL TO ENHANCE STOCKHOLDER VALUE.

We may investigate potential strategic transactions, including the acquisitions of products, technologies and companies, and other alternatives within and outside of our industry with the goal of maximizing stockholder value. We may never complete a strategic transaction(s) and in the event that we do complete a strategic transaction(s), it may not be consummated on terms favorable to us. Further, such transactions may impair stockholder value or otherwise adversely affect our business. Any such transaction may require us to incur non-recurring or other charges and may pose significant integration challenges and/or management and business disruptions, any of which could harm our results of operation and business prospects.

WE MAY NOT BE ABLE TO OBTAIN OR SUSTAIN MARKET ACCEPTANCE FOR OUR SERVICES AND PRODUCTS.

We do not intend to engage in advertising during our development phase. Failure to establish a brand and presence in the marketplace on a timely basis could adversely affect our financial condition and operating results. We may fail to successfully complete the development and introduction of new products or product enhancements, and new products that we develop may not achieve acceptance in the marketplace. We may also fail to develop and deploy new products and product enhancements on a timely basis. Any of the foregoing could require us to revise our business plan, raise additional capital or curtail operations.

OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY.

Our success depends, to a significant degree, upon the protection of our, and that of our licensors', proprietary technologies. We exploit our technology through owning the patent itself and through a sublicense of the patent from Bio-Products International, Inc (BPI). BPI licenses this patent from the patent owner, which had been, until recently, the University of Alabama in Huntsville (UAH). Although we recently acquired ownership of the patent from the University, our use of the technology is still subject to our sublicense with BPI. Additionally, the need to pursue additional protections for our intellectual property is likely as new products and techniques are developed and as existing products are enhanced, and such protections may not be attained in a timely manner or at all.

Legal fees and other expenses necessary to obtain and maintain appropriate patent protection in the U.S. could be material. Insufficient funding may inhibit our ability to obtain and maintain such protection. Additionally, if we must resort to legal proceedings to enforce our intellectual property rights, or those of our licensors', the proceedings could be burdensome and expensive and could involve a high degree of risk to our proprietary rights if we are unsuccessful in, or cannot afford to pursue, such proceedings.

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We also rely on trade secrets and contract law to protect certain of our proprietary technology. If any of our contracts is breached or if any of our trade secrets becomes known or independently discovered by third parties, we could face significant increased competition and our business could be harmed.

If other persons independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how, the result could be significant increased competition for our services. In addition, we may be required to obtain licenses to patents or other proprietary rights from third parties. If we are unable to obtain such licenses on acceptable terms, we may encounter delays in product development or find that the development, manufacture or sale of products requiring such licenses could be foreclosed.

IF WE DO NOT OBTAIN A SIGNIFICANT SUPPLY OF SOLID WASTE AND TIMELY PAYMENT FOR THAT SOLID WASTE, OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED.

If we do not obtain a supply of solid waste at quantities and qualities that are sufficient to operate our proposed facilities at the expected operating levels, or if third parties do not promptly pay for the solid waste they deliver to us for processing, our financial condition and operating results could be adversely affected. Additionally, our current waste supply agreement does not include a specification requirement for the composition of materials in our incoming waste stream. One or more of the following factors could impact the price and supply of waste:

o defaults by waste suppliers under their contracts;

o changing composition of the material in the waste stream, including the percentage of paper fiber;

o a decline in recyclables in the solid waste supply due to increased recovery by material recovery facilities;

o composting of municipal solid waste;

o incineration of municipal solid waste;

o legal prohibitions against processing of certain types of solid waste in our facilities; or

o increased competition from landfills and increasingly automated recycling facilities.

OUR REVENUES AND RESULTS OF OPERATIONS WILL FLUCTUATE.

Our revenues and results of operations will vary from quarter to quarter in the future. A number of factors, many of which are outside our control, may cause variations in our results of operations, including:

o demand and price for our products;

o the timing and recognition of product sales;

o unexpected delays in developing and introducing products;

o unexpected delays in building and permitting our processing facilities;

o unexpected downtime in operations to maintain or improve equipment;

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o increased expenses, whether related to plant operations, marketing, product development or administration or otherwise;

o the mix of revenues derived from products;

o the hiring, retention and utilization of personnel;

o waste collection companies being impacted by seasonal and cyclical changes and facing competition, work stoppages and environmental issues that could adversely affect our business and operations;

o general economic factors; and

o changes in the revenue recognition policies required by generally accepted accounting principles.

THE DEMAND FOR OUR SERVICES MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL LAWS AND REGULATIONS.

To a certain extent, demand for our services is created by environmental laws and regulations, including (a) requirements to safely dispose of RMSW by various methods including in properly constructed and operated landfills, (b) requirements to attempt to recycle a certain proportion of RMSW, and (c) requirements that businesses operating in the solid waste industry comply with applicable land, water and air emission regulations. The lack of environmental laws and regulations, or the loosening or non-enforcement of existing regulations, would decrease demand for our services and may have a material adverse affect on our business.

THE LOSS OF KEY EXECUTIVES AND THE FAILURE TO ATTRACT QUALIFIED MANAGEMENT COULD LIMIT OUR GROWTH AND NEGATIVELY IMPACT OUR OPERATIONS.

We depend highly upon our senior management team. We will continue to depend on operations management personnel with waste handling experience. At this time, we do not know the availability of such experienced management personnel or how much it may cost to attract and retain such personnel. The loss of the services of any member of senior management or the inability to hire experienced operations management personnel could have a material adverse effect on our operations and financial condition. We do not have an employment agreement with our CEO.

OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY CHANGING RESALE PRICES OR MARKET REQUIREMENTS FOR RECYCLABLE MATERIALS.

The resale price for our recycled products, including our unbleached fiber product, aluminum, and steel, will be tied to commodity pricing. Our results of operations may be adversely affected by changing resale prices or market requirements for these recyclable materials. The resale, and market demand for, these materials can be volatile due to numerous factors beyond our control, which may cause significant variability in our period-to-period results of operations.

ENVIRONMENTAL REGULATIONS AND LITIGATION COULD SUBJECT US TO FINES, PENALTIES, JUDGMENTS AND LIMITATIONS ON OUR ABILITY TO EXPAND.

We are subject to potential liability and restrictions under environmental laws, including those relating to handling, recycling, treatment, storage of wastes, discharges to air and water, and the remediation of contaminated soil, surface water and groundwater. We will also be subject to liability under laws relating to the production of ethanol, electricity and other energy products that we may produce in the future. The waste management industry has been, and will continue to be, subject to significant regulation, including permitting and related financial assurance requirements, as well as to attempts to further regulate the industry through new legislation. Our business is subject to a wide range of federal, state and, in some cases, local environmental, odor and noise and land use restrictions and regulations. If we are not able to comply with the

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requirements that apply to a particular facility or if we operate without necessary approvals, we could be subject to civil, and possibly criminal, fines and penalties, and we may be required to spend substantial capital to bring an operation into compliance or to temporarily or permanently discontinue operations, and/or take corrective actions. We may not have sufficient insurance coverage for our environmental liabilities. Those costs or actions could be significant to us and significantly impact our results of operations, as well as our available capital.

In addition to the costs of complying with environmental laws and regulations, if governmental agencies or private parties brought environmental litigation against us, we would likely incur substantial costs in defending against such actions. We may be, in the future, a defendant in lawsuits brought by parties alleging environmental damage, personal injury, and/or property damage. A judgment against us, or a settlement by us, could harm our business, our prospects and our reputation.

FUTURE COSTS UNDER ENVIRONMENTAL, HEALTH AND SAFETY LAWS MAY ADVERSELY AFFECT OUR BUSINESS.

We could be liable if our operations cause environmental damage to our properties or to the property of other landowners, particularly as a result of the contamination of drinking water sources or soil. Under current law, we could even be held liable for damage caused by conditions that existed before we acquired the assets or operations involved. Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows.

WE MAY BE UNABLE TO OBTAIN OR RETAIN PERMITS THAT ARE REQUIRED TO OPERATE OUR BUSINESS.

Our failure to obtain or retain the permits required to operate our initial facility or additional facilities we may seek to construct would have a material negative effect on our business operations. Permits to operate waste processing facilities have become increasingly difficult and expensive to obtain and retain as a result of many factors including numerous hearings and compliance with zoning, environmental and other regulatory measures. The granting of these permits is also often subject to resistance from citizen or other groups and other political pressures. Our failure to obtain or retain the required permits to operate our facilities could have a material negative effect on our future results of operations.

WE MAY BE EXPOSED TO SUBSTANTIAL LIABILITY CLAIMS IN THE ORDINARY COURSE OF OUR BUSINESS.

Since our personnel are expected to routinely handle solid waste materials, we may be subject to liability claims by employees, customers and third parties. We currently have liability insurance in place, but such insurance may not be adequate to cover claims asserted against us. Also, we may be unable to maintain or purchase such insurance in the future. Either of these events could have a material adverse affect on our financial condition or our ability to raise additional capital.

CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY OR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT OUR BUSINESS.

If any of our products or processes is found to violate third party intellectual property rights, we may be required to re-engineer one or more of those products or processes or seek to obtain licenses from third parties to continue offering our products or processes without substantial re-engineering, and such efforts may not be successful. We may be unable to obtain such licenses at a reasonable cost, if at all. Failure to do so could result in significant curtailment of our operations.

Future patents may be issued to third parties upon which our technology may infringe. We may incur substantial costs in defending against claims under any such patents. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief, which effectively could block our ability to further develop or commercialize some or all of our products or services, and

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could result in the award of substantial damages against us. In the event of a claim of infringement, we may be required to obtain one or more licenses from third parties. We may be unable to obtain such licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such license could have a material adverse effect on our business and results of operations.

OUR SUB-LICENSE AGREEMENT WITH BIO-PRODUCTS INTERNATIONAL, INC. IS NOT EXCLUSIVE IN ALL RESPECTS AND IMPOSES CERTAIN REQUIREMENTS ON US TO MAINTAIN EXCLUSIVITY IN SPECIFIED APPLICATIONS.

Our sub-license agreement with BPI generally grants us the exclusive rights to exploit the technology covered by the license in the United States with respect to most applications. We do not, however, have the exclusive right to applications in which the cellulose biomass product of waste, including municipal solid waste, processed utilizing the licensed technology is either used directly as a fuel source or converted into an end product for energy production (although BPI agreed to grant us a sub-license for such applications on a site-specific basis upon our request). Accordingly, BPI may grant third parties the right to use the technology for the production of marketable solid combustion fuel end products. In order to maintain exclusivity with respect to the other applications, we are required to continue to improve our initial facility in Anaheim, California on a regular schedule or construct new facilities. Our failure to maintain exclusivity of the sub-license could have a material adverse effect on our business, financial condition and results of operations.

WE MAY NOT BE ABLE TO IMPLEMENT SECTION 404 OF THE SARBANES-OXLEY ACT ON A TIMELY BASIS.

The SEC, as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally requiring each public company to include a report of management on the company's internal controls over financial reporting in its annual report on Form 10-K that contains an assessment by management of the effectiveness of the company's internal controls over financial reporting. In addition, the company's independent registered accounting firm must attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting. The requirement to include such a report will first apply to our annual report on Form 10-K for the fiscal year ending December 31, 2008.

We have not yet developed a Section 404 implementation plan. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. How companies should be implementing these new requirements including internal control reforms to comply with Section 404's requirements and how independent auditors will apply these requirements and test companies' internal controls, is still reasonably uncertain.

We can not assure you that we will be able to complete a Section 404 plan on a timely basis. Additionally, upon completion of a Section 404 plan, we may not be able to conclude that our internal controls are effective, or in the event that we conclude that our internal controls are effective, our independent accountants may disagree with our assessment and may issue a report that is qualified. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could negatively affect our operating results or cause us to fail to meet our reporting obligations.

WE MAY BECOME SUBJECT TO LIABILITY AND INCUR INCREASED EXPENDITURES AS A RESULT OF THE RESTATEMENT OF OUR FINANCIAL STATEMENTS.

We previously restated our financial statements for the years ended December 31, 2005 and 2004 and the quarters ended March 31, 2005, June 30, 2005, and September 30, 2005, to correct certain accounting errors in the original financial statements related to the fair value of options and warrants, the relative value of senior secured debt and the related warrants and the classification of redeemable preferred stock.

The principal accounting errors reflected in such financial statements that led to the restatements were as follows:

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1. FAIR VALUE OF OPTIONS AND WARRANTS: In order to properly account for the expense associated with the issuance of options and warrants, we are required to determine the fair value of these securities. In determining this value we undertook a "Black Scholes" analysis, a method of valuation that takes into account the expected volatility of the stock underlying the convertible securities being valued. Because at the time of this valuation we had no stock trading history as a company with the operations of Old WWT (i.e. all of the trading had been as VPTI, a company with no operations), in determining expected volatility, we used the trading prices of a representative sample of companies within our industry as opposed to VPTI's trading history.

Based on our review of current practices in applying the applicable accounting guidelines and further review of the authoritative accounting literature for new public companies, we concluded that the use of a volatility factor more consistent with our stage of life cycle and financial leverage would be more appropriate than a volatility factor based on the trading of shares of companies within our industry. We also changed the price used in calculating the fair value of the warrants issued in connection with the private placement of our Series A Preferred Stock from the price such shares were actually sold at to the quoted market price of our common stock as of the closing of such issuance. These changes affected primarily the recorded value on our balance sheet of debt offering costs, patent and licenses, senior secured debt, redeemable preferred stock, warrant liability, additional paid in capital and deficit accumulated during the development stage.

For the year ended December 31, 2005, these changes resulted in a $250,507 increase in general and administrative expense and a $323,450 increase in fair value of warrant liabilities resulting in a $72,943 net decrease in our net loss for the year. In addition, the amortization of preferred stock warrants, offering costs and beneficial conversion feature classified similar to preferred stock dividends increased by $491,939.

2. RELATIVE FAIR VALUE: In November 2005 we completed a private placement of senior debt securities with detachable warrants. In accounting for this transaction, we discounted the recorded value of the senior debt securities by an amount equal to the fair value of the warrants. Upon further review of the applicable accounting literature, we determined that we should have discounted the senior debt for the "relative fair value" of the warrants rather than the "fair value" of the warrants. Although this had the effect of overstating the discount on the senior debt at December 31, 2005 by approximately $235,000, the change had no impact on our statement of operations for 2005.

3. PREFERRED STOCK: Our preferred stock had been classified as a liability because it is redeemable at the end of five years, at the option of the holders. Upon further review of authoritative literature, we determined that our preferred stock should have been classified as "mezzanine equity" rather than as a liability. This change had no impact on our statement of operations for 2005.

Based on our assessment of the foregoing, we concluded that the factors that resulted in the restatements were caused by a lack of consistent authoritative guidance and not a failure to detect and assess the issues and collect relevant data.

The restatement of these previously issued financial statements could expose us to legal and regulatory risk, such as securities class action or other lawsuits that may be brought against us or our officers and directors, or inquiries, proceedings or actions from United States federal or state regulatory agencies. The defense of any such actions could cause the diversion of management's attention and resources, and we could be required to pay damages to settle such actions if any such actions are not resolved in our favor. Even if resolved in our favor, such actions could cause us to incur significant legal and other expenses. Moreover, we may be the subject of negative publicity focusing on the financial statement inaccuracies and resulting restatements and negative reactions from our stockholders or others with which we do business. The occurrence of any of the foregoing could harm our business and reputation and cause the price of our securities to decline.

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SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.

As of March 27, 2007, we had outstanding 26,257,122 shares of common stock and approximately 17.0 million shares of common stock issuable upon conversion of our outstanding preferred stock, as well as options and warrants to acquire up to an additional approximately 7.0 million shares of common stock. A substantial portion of these shares are either freely tradable shares or eligible for public resale under Rule 144. In addition, we currently have an effective registration statement on file with the SEC which covers the resale of approximately 32 million shares of our common stock (which includes shares of common stock issuable upon conversion of our preferred stock). Sales of the shares subject to Rule 144 or the registration statement, or the possibility that substantial amounts of common stock may be sold in the public market under Rule 144 or the registration statement, may adversely affect prevailing market prices for our common stock and could impair our ability to raise capital through the sale of our equity securities.

THE LIMITED MARKET FOR OUR COMMON STOCK MAY ADVERSELY AFFECT TRADING PRICES OR THE ABILITY OF A SHAREHOLDER TO SELL OUR SHARES IN THE PUBLIC MARKET.

Our common stock is thinly-traded on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would likely be reluctant to follow an unproven, early stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.

SHAREHOLDERS MAY HAVE DIFFICULTY SELLING THEIR SHARES BECAUSE OUR SHARES ARE DEEMED "PENNY STOCKS."

Since our common stock is not listed on the Nasdaq Capital Market, if the trading price of our common stock remains below $5.00 per share, trading in our common stock will continue to be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with a spouse). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Such information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of our common stock and the ability of holders of our common stock to sell their shares.

20

THE HOLDERS OF OUR PREFERRED STOCK HAVE CERTAIN RIGHTS THAT COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK.

Under our articles of incorporation, our board of directors has the power, without further action by the holders of our common stock, to designate the relative rights and preferences of the preferred stock, and to issue the preferred stock in one or more series as designated by our board of directors. The designation of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest of the holders of our common stock or the preferred stock of any other series. The issuance of preferred stock may have the effect of delaying or preventing a change in control of our company without further stockholder acti